Chinese bank wealth management products boom - report

Mon Jul 16, 2012 6:21am EDT

* WMP issuance up 43 percent year-on-year in H2

* Bond and money market products dominate

* Most have maturities less than three months

* Growth fastest among city commercial banks

By Gabriel Wildau

SHANGHAI, July 16 (Reuters) - Sales of wealth management
products (WMPs) by Chinese banks soared in the first half of
2012, a survey released on Monday showed, fueling concerns that
the rise of such products could destabilise China's banking
system.

Sales of WMPs totaled 12.14 trillion yuan ($1.90 trillion)
in January through June, up 43 percent from the same period last
year, a report by CN Benefit, a wealth management consultancy
based in Chengdu, showed. Issuance totaled 6.65 trillion in the
second quarter alone.

Analysts have begun to express concern that the
extraordinary rise of WMPs over the last year is creating hidden
risks in China's banking system.

As customers abandon ordinary deposits in favor of higher
yielding WMPs, banks' cost of funds rise, and their funding base
becomes less stable due to the tendency of customers to chase
the highest yields by transferring funds frequently between
competing products.

At the same time, market observers have criticized some WMPs
for being far more risky than many retail investors realize.

Bank of China, China Merchants Bank,
Industrial and Commercial Bank of China, and Huaxia
Bank took the top five spots in terms of issuance volume. But
the report noted that the fastest growth occurred at small, city
commercial banks.

The report also sheds new light on what type of assets
underlie WMPs. Disclosures accompanying the sale of such
products are often spotty, raising some fears among analysts
that banks may be using the proceeds to fund risky loans to real
estate developers or local government financing vehicles.

The report may put some of these fears to rest. It shows
that 52 percent of all WMPs invest in relatively safe bond and
money market instruments. Due to increased regulatory
restrictions, less than one percent of products are based on
loans and corporate, the report said.

However, 34 percent of products are classified as "mixed,"
which means they could be partially based on loans or other
illiquid investments.

Concern has centered around the potential maturity mismatch
created by the short maturity of WMPs compared to the longer
maturity of the loans that banks are using WMPs to finance.

CN Benefit's report shows that 86 percent of WMPs have
maturity less than one year, while 58 percent have tenors
between one and three months and another 12 percent have tenors
between three and six months.

Nearly five percent of products mature in less than one
month, despite a rule issued by China's banking regulator last
year forbidding products with maturities of 30 days or less.

Another source of risk is a common misperception among
investors that WMPs carry the same low risk as normal bank
deposits.

Though banks are required to disclose risks to investors,
analysts say a perception remains that banks and the government
will not allow retail investors to take losses.

"They typically publish to investors a maximum expected
yield. And usually they do what is necessary to guarantee that
the products achieve this yield," Xiao said.

The industry is expected to gradually move to a model based
on publishing net asset values, so that the risks are more
obvious to investors.

"The industry is still in an exploratory phase," she said.

For its part, China's ailing fund management industry has
recently introduced a series of short-term bond products that
aim to compete with WMPs.
($1 = 6.3789 Chinese yuan)
(Additional reporting by Kelvin Soh in HONG KONG; Editing by
Pete Sweeney and Simon Cameron-Moore)